Assume that in 2019 aggregate demand in Canada begin to grow much faster than aggregate supply. What policy would you recommend to Parliament?

Question

Quizplus · Accepted Answer

If aggregate demand is growing faster than aggregate supply, there is a risk of inflation, as the excess demand will push up the prices of goods and services. One way to counteract this is to decrease government spending, which will reduce demand and help to bring it back in line with supply. Option A is not the best choice, as raising interest rates would also have a negative effect on investment and growth. Option C may be desirable from a social welfare perspective, but it would not directly address the issue of excess demand. Option D is not recommended, as reducing income taxes would further stimulate demand and exacerbate the problem. Option E would also not help to address the underlying issue of excess demand, and may even worsen it if the extra spending leads to more demand.

Assume That in 2019 Aggregate Demand in Canada Begin to Grow